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The valuation of a gas storage facility is characterized as a stochastic control problem, resulting in a Hamilton-Jacobi-Bellman (HJB) equation. In this paper, we present a semi-Lagrangian method for solving the HJB equation for a typical gas storage valuation problem. The method is able to handle a wide class of spot price models that exhibit mean-reverting seasonality dynamics and price jumps. We develop fully implicit and Crank-Nicolson timestepping schemes based on a semi-Lagrangian approach and prove the convergence of fully implicit timestepping to the viscosity solution of a modified HJB equation posed on a bounded domain, provided that a strong comparison result holds. The semi-Lagrangian approach avoids Policy-type iterations required by an implicit finite difference method without requiring additional cost. Numerical experiments are presented for several variants of the basic scheme.

A Semi-Lagrangian Approach for Natural Gas Storage Valuation and Optimal Operation